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Bar Prep! > Corporations > Flashcards

Corporations Flashcards

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1
Q

a de jure corporation

A

a corporation in accordance with law

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2
Q

de facto corporation

A

if all corporate laws have not been followed, a de facto corporation might result

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3
Q

creation of a de jure corporation (three steps simplified)

A

(1) a person
(2) a paper
(3) an act

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4
Q

person—incorporators

A

to form a corporation, we need one or more persons who undertake to form it, who are known as the incorporators

they must execute and deliver the articles of incorporation to the secretary of state

they do not need to be citizens of the state of incorporation (and can be a person or entity)

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5
Q

articles of incorporation (the paper)

A

must include the name of the incorporation
the name and address of each incorporator
a registered agent and the street address of the registered office, which is in the state
information regarding the corporation’s stock

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6
Q

Business Purposes under the MBCA

A

Under modern corporation statutes, a corporation is given the power to do all things necessary or convenient to effect its purposes

most modern statutes also provide that a corporation may be formed for any lawful purpose

combined, these provisions provide authority for a corporation to do almost anything that is rationally related to a business purpose

thus, unless an exam question restricts a corporation’s purposes, you should usually find corporate acts to be within the corporation’s powers

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7
Q

ultra vires acts

A

activities beyond the scope of a corporation’s stated business purposes are said to be “ultra vires”

under the common law, ultra vires acts were generally unenforceable

under the MBCA, ultra vires acts generally are enforceable

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8
Q

act

A

to complete formation of the corporation, the incorporators will have notarized articles delivered to the secretary of state and pay any required fees

corporate existence begins upon this filing by the state; the filing is conclusive proof of corporate existence

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9
Q

organizational meeting

A

if the initial directors were named in the articles, the board of directors hold the organizational meeting

if they were not named in the articles, the incorporators hold the organizational meeting

the purpose of the meeting is to “complete the organization of the corporation,” which means (1) adopt initial bylaws and (2) appoint officers

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10
Q

bylaws

A

bylaws are an internal document

bylaws may contain any provision for managing the corporation that is not inconsistent with the articles or law

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11
Q

internal affairs doctrine

A

under the internal affairs doctrine, the internal affairs of a corporation are governed by the law of the state of incorporation

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12
Q

entity status

A

upon formation, the corporation has entity status, meaning it’s a legal person

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13
Q

unaware of the failure to form a de jure corporation

A

two doctrines may still allow the incorporators to escape liability: (1) de facto corporation and (2) corporation by estoppel

one important characteristic of BOTH THESE DOCTRINES is that anyone asserting either doctrine must be unaware of the failure to form a de jure corporation

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14
Q

de facto corporations (requirements)

A

there must be a relevant incorporation statute

the parties made a good faith, colorable attempt to comply (meaning the parties tried and came close to forming a corporation)

there must have been some exercise of corporate privileges, meaning the parties were acting as though they thought there was a corporation

limitation: remember that the de facto doctrine can be raised as a defense to personal liability only by a person who is unaware that there was no valid incorporation

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15
Q

corporation by estoppel

A

under the common law doctrine of corporation by estoppel, persons who have dealt with the entity as if it were a corporation will be estopped from denying the corporation’s existence

ONLY APPLIES IN CONTRACTS CASES

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16
Q

status of the corporation by estoppel and de facto corporation doctrines

A

these doctrines have been abolished in many states (and you should note as much)

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17
Q

promoter

A

a promoter is a person acting on behalf of the corporation not yet formed

before a corporation is formed, promoters procure commitments for capital and other instrumentalities that will be used by the corporation after its formation

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18
Q

promoters’ relationships with each other

A

promoters are joint venturers (partners) who have a fiduciary relationship with each other

they breach that fiduciary duty if they secretly pursue personal gain at the expense of their fellow promoters

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19
Q

promoters’ relationship with the corporation

A

a promoter’s fiduciary duty to the corporation is one of fair disclosure and good faith

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20
Q

breach of fiduciary duty arising from promoters’ sales to the corporation

A

a promoter who profits by selling property to the corporation may be liable for his profit UNLESS all material facts of the transaction were disclosed

disclosure must be to ALL WHO ARE CONTEMPLATED to be part of the initial financing scheme

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21
Q

corporation’s liability for contracts entered by promoters prior to incorporation

A

since the corporate entity does not exist prior to incorporation, it is NOT BOUND to contracts entered into by the promoter in the corporate name before incorporation

the corporation may become liable only if it expressly or impliedly adopts the promoter’s contract

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22
Q

promoter’s liability

A

anyone who acts on behalf of a corporation knowing that it is not in existence is jointly and severally liable for the obligations incurred

if a promoter enters into an agreement with a third party on behalf of a planned but unformed corporation, the promoter is PERSONALLY LIABLE on the contract

the promoter’s liability CONTINUES after the corporation is formed, even if the corporation adopts the contract and benefits from it

the promoter will be released from liability only if there’s been an express or implied novation (that is, an agreement among all three parties to release the promoter from liability and substitute the corporation for the promoter in the contract)

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23
Q

T/F: If the agreement expressly relieves the promoter of liability, it will be treated as an OFFER to the corporation.

A

TRUE

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24
Q

subscriptions

A

subscriptions are written offers to buy stock from a corporation

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25
Q

preincorporation subscription

A

preincorporation subscriptions are IRREVOCABLE for six months, unless otherwise provided in the term of the subscription agreement or unless all subscribers consent to revocation

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26
Q

postincorporation subscriptions

A

postincorporation subscriptions are revocable until accepted by the corporation

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27
Q

consideration for the issuance of stock

A

stock (or an option to buy stock) may be issued for any tangible or intangible property or benefit to the corporation

this includes services ALREADY PERFORMED for the corporation

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28
Q

par

A

par means minimum issuance price

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29
Q

watered stock

A

on the bar exam, if you’re given par stock, watch for WATERED stock, which can occur when par value stock is issued for less than its par value

C Corp. issues 10,000 shares of $3 par to X for $22,000. Who is liable? The directors (if they knowingly authorized the issuance) and X (who is charged with notice of the par value).

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30
Q

traditional view—par

A

traditionally, stock could not be issued by a corporation for LESS than the stock’s stated par value, and the consideration received for the par value stock had to be held in a certain account containing at least the aggregate par value of the outstanding par value shares

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31
Q

MBCA Approach—Board Determines Value

A

The MBCA generally has eliminated the concept of par and allows corporations to issue shares for whatever consideration the directors deem appropriate

the board’s valuable is CONCLUSIVE if made in good faith

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32
Q

preemptive rights must be stated in the articles

A

shareholders do not have preemptive rights to purchase newly issued shares to maintain their proportional ownership interest unless the articles of incorporation provide the right

so if the articles are silent on this issue, we do NOT have preemptive rights

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33
Q

limitations on preemptive rights

A

even if the articles do provide a preemptive right, shareholders generally have no preemptive right in shares issued for consideration other than cash and within six months after incorporation

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34
Q

election of directors

A

initial directors may be named in the articles

if not, they are elected by the incorporators at the organizational meeting

after that, the shareholders elect the directors (at the annual shareholders’ meeting)

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35
Q

removal of directors

A

shareholders can remove directors before their terms expire

shareholders may generally remove a director with or without cause

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36
Q

board meetings: notice for regular meetings

A

notice is not required

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37
Q

board meetings: notice for special meetings

A

at least two days’ written notice of date, time, and place

the notice need not state the purpose

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38
Q

directors and proxies

A

directors cannot give proxies or enter voting agreements for how they will vote as directors because directors owe the corporation non-delegable fiduciary duties

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39
Q

failure to give notice for a special directors’ meeting

A

failure to give required (two days’) notice means that whatever happened at the meeting is void or voidable, unless the directors who were not notified waive the defect (in writing or by attending the meeting without objecting)

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40
Q

quorum at board meetings

A

for any meeting of the board, we must have a quorum (a majority of all directors)

without a quorum, the board cannot act

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41
Q

action by unanimous written consent

A

remember that any action required to be taken by the directors at a formal meeting may be taken by unanimous consent, in writing, without a formal meeting

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42
Q

fiduciary duties of directors: the standard

A

a director must discharge her duties in good faith and with the reasonable belief that her actions are in the best interest of the corporation

she must also use the care that a person in like position would reasonably believe appropriate under the circumstances

the duty of care and loyalty^^

43
Q

nonfeasance

A

nonfeasance occurs when a director basically does nothing

we have a “lazy director”

the director is only liable if his breach “caused” the loss to the corporation. it is difficult to show causation in nonfeasance cases

44
Q

misfeasance

A

misfeasance occurs when the board makes a decision that hurts the business

causation is much more clear

45
Q

business judgment rule

A

a director is not liable for misfeasance if she meets the business judgment rule

directors who meet the standard will not be liable for corporate decisions that in hindsight turn out to be poor or erroneous

the business judgment rule is a presumption that when the board took an action, it did its appropriate homework

the burden is on the plaintiff to show that the board either did not do appropriate homework or did something very stupid

the court will not second guess a business decision if it was made in good faith, was informed, and had a rational basis

46
Q

reliance on reports and other information

A

in discharging her duties, a director is entitled to rely on information, opinions, reports, or statements (including financial statements) prepared by those associated with an employed by the corporation

47
Q

duty of loyalty: burden

A

duty of loyalty cases are about conflicts of interest, and the burden in these cases is on the defendant

48
Q

business judgment rule and duty of loyalty

A

the business judgment rule does not apply

49
Q

conflicting transactions // “self dealing”

A

this is any transaction between the corporation and one of its directors or that directors close relative or another business of the director’s

50
Q

upholding conflicting interest transactions

A

a conflicting interest transaction will not be enjoined, set aside, or give rise to an award for damages if:

(1) it was approved by a majority (but at least two) of the disinterested directors after the director disclosed all material facts to the board or that they were known when the board approved the transactions; OR
(2) it was approved by a majority of votes entitled to be cast by disinterested shareholders (notice of the shareholders’ meeting must describe the transaction); OR
(3) judged by the circumstances at the time the corporation entered into the transaction, it was FAIR to the corporation

51
Q

special quorum requirements for conflicting interest transaction approvals

A

for purposes of a vote on a conflicting interest transaction, at a director’s meeting, a quorum is a majority (at least two) of disinterested directors

52
Q

T/F: Even if the self-dealing deal is approved by the appropriate group, some courts also require a showing of fairness

A

TRUE

53
Q

corporate opportunity doctrine

A

the directors’ fiduciary duties prohibit them from diverting a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act

54
Q

corporate opportunity doctrine: what is a corporate opportunity?

A

a usurpation problem arises ONLY IF a director takes advantage of a business opportunity in which the corporation would have an INTEREST or EXPECTANCY

55
Q

loans to directors

A

a corporation can make a loan to a director if it is reasonably expected to benefit the corporation

56
Q

determining director liability: presumption of concurrence

A

a director is presumed to concur with board action unless her dissent or abstention is noted in writing in the corporate records

an oral dissent, by itself, is not effective

57
Q

T/F: Shareholders hire and fire officers.

A

FALSE

They hire/fire directors, who hire/fire officers.

58
Q

categories of indemnification of directors, officers, and employees

A

(1) No indemnification;
(2) Mandatory Indemnification;
(3) Permissive Indemnification

59
Q

no indemnification

A

a corporation cannot indemnify a director who is (1) held liable to the corporation; or (2) held to have received an improper benefit

60
Q

mandatory indemnification

A

a corporation MUST indemnify a director or officer who WAS SUCCESSFUL in defending a proceeding on the merits or otherwise against the officer for director for reasonable expenses, including attorneys’ fees, incurred in connection to the proceeding

they are entitled to indemnification “to the extent” they win; but some states require the director to have won the whole case to be entitled to mandatory indemnification

61
Q

permissive indemnification

A

a corporation MAY indemnify a director for reasonable litigation expenses incurred in UNSUCCESSFULLY DEFENDING a suit brought against the director on account of the director’s position if the director (1) acted in good faith; and (2) believed that her conduct was in the best interests of the corporation

62
Q

close corporations & shareholder management

A

shareholders can run the corporation directly in a close corporation

the characteristics of a close corporation are that there are few shareholders and the stock is not publicly traded

63
Q

who owes the duties of care and loyalty to the corporation?

A

whoever MANAGES the corporation

64
Q

special fiduciary duty in close corporations

A

in many states, courts impose a fiduciary duty on shareholders owed to other shareholders in a close corporation

65
Q

can shareholders be held liable for corporate debts?

A

generally, no

but a shareholder might be personally liable for what the corporation did if the court PIERCES THE CORPORATE VEIL, which can happen in close corporations ONLY

66
Q

piercing the corporate veil

A

to pierce the corporate veil and hold shareholders personally liable:

(1) the shareholders must have abused the privilege of incorporating; and
(2) fairness must require holding them liable

sloppy administration is not enough

67
Q

alter ego—piercing the corporate veil

A

if the shareholders ignore corporate formalities such that the corporation may be considered the “alter ego” or a “mere instrumentality” of the shareholders OR ANOTHER CORPORATION, and some basic injustice results, a court might pierce the corporate veil

these situations may arise where shareholders treat corporate assets as their own, commingle their money with corporate money, and so on

68
Q

undercapitalization—piercing the corporate veil

A

the corporate veil may be pierced where the corporation is inadequately capitalized, so at the time of formation, there is not enough unencumbered capital to reasonably cover prospective liabilities

courts may be more willing to pierce the corporate veil for a tort victim than for a contract claimant

69
Q

shareholder derivative suit

A

if the shareholder believes the corporation has been wronged but the directors have not done anything to enforce its rights with respect to the wrong, the shareholder may be able to bring a shareholder derivative suit to enforce the corporation’s rights

could the corporation have brought this suit? if so, it’s a derivative suit

70
Q

shareholder direct actions

A

a direct action may be brought for breach of a fiduciary duty owed to the shareholder by an officer or director

any recovery is for the benefit of the individual shareholder

71
Q

requirements for derivative suits: standing

A

to commence and maintain a derivative proceeding, a shareholder must have been a shareholder AT THE TIME the claim arose or must have become a shareholder through transfer by operation of law from someone who did own the stock at the time the claim arose

72
Q

stock transfer by operation of law examples

A

getting stock through inheritance or divorce decree

73
Q

derivative suits: demand requirements

A

the shareholder must make a written demand on the corporation (usually, the board) to take suitable action

in some states, this demand must ALWAYS be made, and the shareholder cannot sue until 90 days after making this demand, unless:

(1) the shareholder has earlier been notified that the corporation has rejected the demand; or
(2) irreparable injury to the corporation would result by waiting for the 90 days to pass

other states say that shareholders are not required to make the demand if the demand would be futile (say, if the directors would be the defendants)

74
Q

derivative suits: requirements for joinder of the corporation

A

the corporation must be joined to the suit as a defendant

even though the suit asserts the corporation’s claim, since the corporation did not do so, it is joined as a defendant

75
Q

dismissal and settlement of derivative suits

A

the parties can settle or dismiss a derivative suit only with court approval (which looks to good faith, a reasonable inquiry, and the best interests of the corporation)

76
Q

authorized stock

A

the number of shares the corporation may issue (set in the articles)

77
Q

issued stock

A

the number of shares the corporation has sold

78
Q

outstanding stock

A

the shares the company issued but has not reacquired

79
Q

effect of the record date

A

shareholders of record on the record date may vote at the meeting

the record date is fixed by the board of directors

80
Q

70-day rule for record dates

A

the record date may not be more than 70 days before the shareholder meeting

81
Q

voting by proxy

A

a proxy is (1) a writing; (2) signed by the record shareholder; (3) directed to the secretary of the corporation; and (4) authorizing another to vote the shares

82
Q

revocation of proxy

A

a proxy is generally revocable by the shareholder and may be revoked by the shareholder attending the meeting to vote themselves, in writing to the corporate secretary, or by subsequent appointment of another proxy

83
Q

irrevocable proxies

A

a proxy will be irrevocable only if it sates that it is irrevocable and is coupled with an interest or given as security

84
Q

voting trust

A

a written agreement of shareholders under which all of the shares owned by the parties to the agreement are transferred to a trustee, who votes the shares and distributes the dividends in accordance with the provisions of the voting trust agreement

in some states, the trust is not valid for more than 10 years unless extended

it must be filed with the corporation

85
Q

voting agreement

A

rather than creating a trust, the shareholders can enter a voting or pooling agreement providing for how they’ll vote their shares

the requirements are that the agreement be in writing and signed

it need not be filed with the corporation and is not subject to a time limit

86
Q

special shareholder meetings: who may call them

A

(1) board of directors; (2) the president; (3) the holders of at least 10% of the outstanding shares

87
Q

shareholder meetings: notice requirement

A

shareholders must be notified of meetings not fewer than 10 or more than 60 days before the meeting

88
Q

special shareholder meeting purpose requirement

A

for special meetings, the notice must state the purpose of the meeting

the shareholders cannot do anything else at the meeting other than vote/act on the stated purpose

89
Q

quorum lost (special rule for shareholder meetings)

A

quorum is not lost if people leave the meeting

90
Q

voting requirement to elect a director

A

plurality

91
Q

voting requirement to approve a fundamental corporate change

A

traditional approach: majority of the shares entitled to vote

modern approach: majority of shares that actually vote

92
Q

voting requirement to remove a director

A

traditional approach: a majority of the shares entitled to vote

modern approach: the majority of shares that actually vote

93
Q

voting requirements for all other issues (other than election of a director, removal of a director, or a fundamental corporate change)

A

a majority of the shares that actually vote

94
Q

cumulative voting

A

ONLY relevant for close corporations; ONLY for election of directors; and ONLY exists if the articles permit it

multiply the shareholder’s number of voting shares times the number of directors to be elected

95
Q

enforcing a restriction on the transfer of stock agains the transferee

A

if the restriction is valid (“reasonable”), it can be enforced against the transferee if (1) the restriction is conspicuously noted on the stock certificate; or (2) the transferee had actual knowledge of the restriction at the time of the purchase

96
Q

the board’s discretion & dividends or other distributions

A

a shareholder has a “right” to a dividend or other distribution only when the board declares it

97
Q

compelling distributions

A

the plaintiff must make a very strong showing of abuse of discretion

98
Q

liability for unlawful distributions

A

under the modern view, a corporation CANNOT make a distribution if it’s insolvent or if the distribution would render it insolvent

directors are jointly and severally liable for improper distributions

a director who votes for or assents to a distribution that violates the above rule is PERSONALLY LIABLE to the corporation for the amount of the distribution that exceeds what could have been properly distributed

but a director has a “good faith reliance” defense—it cannot be held liable for distributions approved in good faith

99
Q

liability for unlawful distributions (shareholders)

A

shareholders are personally liable only if they knew the distribution was improper when they received it

100
Q

procedure for fundamental corporate change

A

to do any fundamental corporate change, we need (1) board action adopting a resolution of fundamental change; (2) board submits the proposal to the shareholders with written notice; and (3) shareholder approval

we also, for most fundamental changes, need to deliver a document to the secretary of state

101
Q

dissenting shareholder right of appraisal

A

the dissenting shareholder (to a fundamental corporate change) has a right of appraisal, meaning the shareholder may force the corporation to buy their stock for fair value

ONLY applies to merger or consolidation; transferring substantially all assets; stock being acquired in share exchange; and converting to another form of business

DOES NOT apply to dissolution

102
Q

when is there never an appraisal right?

A

even if the company is making a fundamental change other than dissolution, there is no appraisal right if the company’s stock is listed on a national exchange (that is, it’s a publicly traded corporation) or if the company has 2,000 or more shareholders and the shares involved have a value of at least $20 million

the right of appraisal exists in CLOSE corporations

103
Q

perfecting a right of appraisal

A

before the shareholder’s vote, the shareholder must file with the corporation a written notice of objection and intent to demand payment

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